Equities

To aid investment committees in their effort to maneuver through buy, hold and sell decisions within equities, we have provided a snapshot into a the large cap segment of the market.

The first chart lists the current P/E for the index and it’s sectors based on 2013 EPS estimates. S&P lists the PEG ratios for each. The PEG ratio divides the P/E by projected growth rates. A level of 1 implies a fairly valued market, a level above that an expensive market and below 1 a cheap market.

Just based on this metric, the overall market is rich, the IT sector is cheap while Telecomm and Utilities are expensive.

Source-S&P Website through 1/17/13

S&P 500

S&P 500 5YR

S&P 500

2013 EST

PROJ ANNUAL

PEG

OPER P/E

GROWTH %

Index

13.17

10.64

1.24

Consumer Discretionary

15.65

15.58

1.00

Consumer Staples

15.47

9.33

1.66

Energy

11.61

6.93

1.68

Financials

11.89

10.22

1.16

Health Care

13.35

9.04

1.48

Industrials

13.62

11.23

1.21

Information Technology

12.05

14.17

0.85

Materials

13.68

8.76

1.56

Telecommunication Services

16.27

4.17

3.90

Utilities

14.43

4.03

3.58

This information could be used along with additional metrics to determine areas within the market that may warrant closer attention for sale or purchase.

PEG ratios have severe limitations and should be used to possibly begin a search and should be used as only one of many metrics to determine value. Each industry or sector should be evaluated for the appropriateness of the PEG ratio as a metric.

Below is a small table that displays the EPS estimates by S&P and below is a short explanation for each of the estimate methodologies. We enjoy taking a simple average for scenarios with various P/E ratios to help define a potential range for the S&P 500.

We then show a couple hypothetical scenarios although there are more assumptions and more scenarios.

— 12 MONTH EARNINGS PER SHARE —

OPERATING

AS REPORTED

OPERATING

EARNINGS

EARNINGS

EARNINGS

(ests are

(ests are

(ests are

bottom up)

top down)

top down)

$112.49

$100.71

$107.20

Operating earnings:

Income from product (goods and services),

As Reported earnings:

Income from continuing operations, also known GAAP (Generally Accepted Accounting Principles)

Bottom up estimate:

Capital IQ consensus estimate for specific issue, building from the bottom up to the index level estimate

$106.80 is the average of the three estimates for the S&P 500 and at today’s price of $1494 the p/e is 13.98x.

While reasonable, if margins or sales contract, EPS will also come down. If estimates are high by 10%, the EPS comes in at $96.12. This leaves the index at 1345 if the same P/E is applied. This would be a 10% correction.

Assume the same growth of EPS comes in and we apply a 15x EPS. The index would climb to 1600 or 7% higher.

The basic range then is 10% downside with 7% upside with these simplistic assumptions.

Given this, we recommend an examination of your portfolio beta to determine if your risk is higher or lower than the overall market as defined by the S&P 500. If you are more concerned about the downside, then sell some higher beta names for lower ones while maintaining equity exposure within pre-defined ranges.

Lastly, it is good to look at revenue and margins.

Here are two additional growth rates with respect to sales and margins for the S&P 500.

While positive overall, it makes sense to dissect your holdings to determine if your funds overall are growing Sales, Margins and EPS faster or slower than the S&P500. Talk to your mutual fund managers to determine if they are worth holding based on comparable metrics.

While this short piece simplifies S&P 500 index level approximation, it can serve as a guide and one piece of input into your firm’s equity outlook.